FYI | Dec 17 2013
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
There was good news and bad news for the currency bloc today. The good news is that Germany’s manufacturing sector is powering through to the end of the year. The manufacturing PMI rose to its highest level since mid-2011, while the service sector was slightly weaker than expected, but still remained well above the crucial 50.0 level at 54.0.
Since Germany is the largest economy in the currency bloc, its economic performance is closely watched by the market and when it is strong it can help the EUR to rally. In contrast, things continue to get worse for France. The advanced PMIs for December plunged further into contraction territory and it is now underperforming some of the weakest peripheral economies.
The latest PMI data is further evidence of the uneven recovery in the currency bloc, with Germany leading the way and other economies, with large fiscal adjustments they still need to make, continuing to lag behind.
Dax: long term outlook determined by the Fed
This is good news for the Dax, which is trending higher today. It broke above the 50-day sma earlier and is extending gains as we progress through the European session. Near term resistance lies at 9,150 – the high from 11th Dec, then 9,220 – the high from 10th Dec, ahead of 9,424 – a record high from 2nd Dec. While the domestic fundamentals support some short term gains in the Dax, the longer term outlook will be dependent on the outcome of the Fed meeting, in our view. If the Fed delays tapering this could trigger a break above 9,424 highs and a move into fresh record-breaking territory. (See fig 1).
Even with a Fed taper EUR downside could be limited…
The EUR is shrugging off the bad news from France and instead focusing on: 1, the better data from Germany and 2, the increase in the trade balance; the non-adjusted October surplus rose to EUR 17.2bn up from EUR 13.1bn in September. In this environment where the ECB seems tolerant of low inflation and unlikely to pump the economy with more stimuli the direction of the EUR is likely to be determined by this week’s FOMC meeting. No action from the FOMC may be the best outcome for the EUR as it could weigh on the greenback. However, if the Fed does start to taper the downside for EUR could be limited. Believe it or not, domestic fundamentals are fairly supportive of the single currency, particularly the growing current account surplus (see fig 2) and repayment of LTTRO loans, which has pushed up short-term inter-bank lending rates (EONIA) which tend to be currency supportive (see fig 3). In contrast, US inter-bank lending rates have barely moved in recent weeks. Added to this, although the US congress agreed on a Budget deal last week, raising the debt ceiling could be harder to achieve and may spook dollar bulls through to the end of the year.
From a technical perspective, EURUSD is having another run at 1.3800, 1.3832 is still key resistance ahead of the FOMC. Key support lies at 1.3710 – the low from Friday, then 1.3599 – the 50-day sma.
Figure 1:
SOURCE: THIS IS A BLOOMBERG CHART AND DOES NOT REPRESENT THE PROCES OFFERED BY FOREX.com
Figure 2:
Source: FOREX.com and Bloomberg
Figure 3:
Source: FOREX.com and Bloomberg
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